What does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics*

TLDR

Consumer responsiveness to medical‑care prices is a central issue in health economics and a key factor in designing and regulating health insurance markets. The study investigates how consumers react to the complex structure of a high‑deductible health‑insurance contract. Using a natural experiment that switched a large self‑insured firm’s employees from free care to a nonlinear, high‑deductible plan, the authors decomposed the resulting 12–14% reduction in firm‑wide health spending into price shopping, quantity reductions, and quantity substitutions, finding that the decline was entirely due to reduced service quantities. The switch cut spending by 12–14%, with no evidence of price‑shopping learning over two years, a 42% drop in spending when consumers faced the deductible’s spot price, and reductions in both valuable and wasteful services.

Abstract

Abstract Measuring consumer responsiveness to medical care prices is a central issue in health economics and a key ingredient in the optimal design and regulation of health insurance markets. We leverage a natural experiment at a large self-insured firm that required all of its employees to switch from an insurance plan that provided free health care to a nonlinear, high-deductible plan. The switch caused a spending reduction between 11.8% and 13.8% of total firm-wide health spending. We decompose this spending reduction into the components of (i) consumer price shopping, (ii) quantity reductions, and (iii) quantity substitutions and find that spending reductions are entirely due to outright reductions in quantity. We find no evidence of consumers learning to price shop after two years in high-deductible coverage. Consumers reduce quantities across the spectrum of health care services, including potentially valuable care (e.g., preventive services) and potentially wasteful care (e.g., imaging services). To better understand these changes, we study how consumers respond to the complex structure of the high-deductible contract. Consumers respond heavily to spot prices at the time of care, reducing their spending by 42% when under the deductible, conditional on their true expected end-of-year price and their prior year end-of-year marginal price. There is no evidence of learning to respond to the true shadow price in the second year post-switch.